The US Federal Reserve stepped in with a large rate cut today, its first outside its normal schedule of meetings since the Lehman crisis erupted in 2008 and plunged the world, Ireland included, into the worst recession since the 1930s.
Since that time, our reliance on the world’s central banks – the Fed, European Central Bank, Bank of Japan and Bank of England – has only increased and they have bought somewhere in the region of €14 trillion of government bonds, so it was more a question of when rather than if they would step in.
Today’s cut saw the Federal Funds rate at the world’s most important central bank reduced by half a percentage point to a range of 1.0-1.25pc as it took measures to deal “evolving risks to economic activity” posed by the spread of coronavirus.
Dario Perkins, the top economist at leading consultancy TS Lombard, noted that the rate cut was not about offsetting a large decline in spending by consumers, much of which is never coming back.
What it is about is preventing the economic contagion from spreading.
“If companies start to fire people, or cannot service their debts, even a temporary demand problem become an outright recession,” Mr Perkins said.
“Cutting interest rates helps to reduce debt servicing costs and might offset any tightening in financial conditions,” he said.
It is no surprise that the Fed led the way.
The US central bank was far more proactive than the European Central Bank when it came to tackling the financial crisis.
Europe dithered and even increased interest rates, the Fed was cutting with the result that the American economy recovered much more quickly.
The legacy of those actions can be seen today: the Fed has much more room to cut interest rates than the ECB whose initial mishandling of the Eurozone debt crisis prolonged it with the result that ECB interest rates currently stand at a negative 0.5pc more than a decade later.
The path for the ECB is likely to see it expand its asset purchase programme which it restarted in September last year amid opposition from a number of it policymakers.
At the start of this week ECB chief Christine Lagarde issued a statement saying it was “closely monitoring developments” and stood ready “to take appropriate and targeted measures, as necessary and commensurate with the underlying risks”.
That statement reveals the hefty constraints on its field of action.
Many economists say that there is now a real risk that further interest rate cuts from the Frankfurt-based institution could undermine economic confidence rather than bolstering it.
Ideally, the solution in Europe would be higher government spending and with record low interest rates, the cost of an expansionary fiscal policy is far less than usual.
Still, something is better than nothing, and sooner would be better than later, given the reluctance of European governments to loosen their purse strings.
“Crucially, central banks have keep defaults to a minimum by supporting the credit cycle and encouraging loan forbearance. If the central banks could deliver even a temporary calm in stock markets, this is worth trying,” he said.
The question no one can answer is how long the pandemic, the factory closures and the fear will last.
The US Federal Reserve delivered an emergency half-percentage point interest rate cut yesterday in a bid to protect the economy from the spread of coronavirus, a day after the European Central Bank said it was “monitoring developments”.
The new coronavirus will have a big impact on the workplace – ranging from being a potential breeding ground for infection to workers having to self-isolate at home for fourteen days. Will people be paid and how will they pay their bills?